Building a bridge to profitability

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This article was published 29/07/2023 (823 days ago), so information in it may no longer be current.

Highways, light rail transit, wind farms, airports and hospitals are all key pieces of the economy — or infrastructure — that have been receiving billions of dollars in funding from government and the private sector.

It’s one reason that investment industry experts have considered infrastructure an asset class to hold in your portfolio. Yet that is only the tip of the cellphone tower — so to speak.

That need for investor dollars will only accelerate with many studies forecasting a massive need for funding as nations’ infrastructure ages and climate change forces society to build better sewage, energy and other critical systems to deal with extreme weather and decarbonization of the economy.

Among those is a recent report from the think-tank the Atlantic Council, forecasting that a financing gap of about $15 trillion globally will grow between now and 2040, requiring additional global spending of at least $1 trillion annually just to meet the planet’s minimum need.

Governments are heeding the call. In the U.S., Congress has passed many new laws, notably the Infrastructure Investment and Jobs Act and the Inflation Reduction Act that include more than US$1 trillion in new investment.

Closer to home, the federal government has created the Canada Infrastructure Bank to spur tens of billions of dollars in new projects.

To boot, just look around Winnipeg. There’s plenty of roadwork and other projects going on, and an obvious need for much more.

All of this suggests a big opportunity for investors.

Just ask one of the leading lenders in the space in Canada — Stonebridge Financial Corporation, a lender for mid-sized public-private-partnerships (PPPs) since the late 1990s.

“There is a net need for new infrastructure, and there’s also an ever-growing need to rehabilitate, update and modernize aging existing infrastructure,” says Dan Simunac, co-chief executive officer at Stonebridge.

The firm has been working in the space, providing $7.5 billion in loans to projects including toll roads, wind and solar power, hospitals and long-term care since its founding in 1999.

“We’ve been doing this before people were not even calling it ‘P3’ or ‘infrastructure’ investing,” says Cam Di Giorgio, co-CEO at Stonebridge.

Stonebridge was also investing in green energy projects before it became the big thing it is today. In fact, the green energy transition — moving away from fossil fuels to renewable power — is among the largest new infrastructure investments currently going on in Canada and globally, he adds.

Now, if you’re thinking you’d like to get a piece of the action Stonebridge offers, your portfolio is likely not large enough.

It largely serves institutional investors — like endowment funds and pension plans.

Part of the reason for this, Di Giorgio explains, is due to the nature of infrastructure projects. Most are private market ventures, so they are not available through stock exchanges or the bond markets. These projects are very costly and long-term in nature to develop. That makes them very illiquid and ill-suited for retail investors — average folks — who tend to need/want their money back quickly for a variety of reasons, including market and economic stress.

That’s not to say we do not have direct exposure already. Workplace pensions and CPP (Canada Pension Plan) are major investors in infrastructure projects and even own some of these assets.

Yet there are more accessible ways to get exposure for retail investors — albeit indirect exposure — through mutual funds and exchange-traded funds (ETFs).

“If you’re investing in an ETF that covers even the S&P 500, you’re getting exposure to companies involved in infrastructure projects,” says Daniel Straus, managing director of ETFs and financial products research at National Bank of Canada Financial Markets.

Investors would end up owning through a low-cost ETF, like iShares Core S&P 500 ETF for example, companies like American Tower Corp. (cellphone towers), Union Pacific Corp. (rail), Martin Marietta Materials (building supplies) and Caterpillar (construction machinery). All of which stand to benefit from increased investment in infrastructure, he adds.

There are also funds specifically focused on companies with infrastructure exposure, including BMO’s Global Infrastructure Index ETF, for a more targeted approach.

Yet the performance of these funds can be uneven and subject to the whim of speculative investors.

“We see a lot of inflows into this sector when there is big headline news around government infrastructure spending like the green energy bill in the U.S.,” Straus says.

“But the line between increased infrastructure spending and the actual profitability for these companies as a result is much more blurred.”

Still, these funds have proven their worth for long-term investors.

BMO’s ETF has averaged a 10 per cent annualized return since its start in 2010. In more tangible terms, $10,000 invested at its launch would be worth about $40,000 today.

Other funds offer similar exposure — generally tracking the same underlying index (Dow Jones Brookfield Global Infrastructure North American Listed Index) or similar ones, Straus says.

Be it ownership through a pension fund, or investing in companies that stand to benefit from a deluge of government funding for infrastructure, tilting some capital toward this asset class is likely to provide steady growth for your portfolio.

“The tailwinds in this space are inevitable,” Simunac says.